Underneath the housing crisis, the crisis of the capitalist economy

3125 reads

At the time of writing, the
huckster Richard Branson has made some sort of a bid for the bankrupt Northern
Rock bank and despite the massive state intervention (estimated by some to eventually
total some forty billion pounds) by the Bank of England, it is still not out of
the woods. In fact if, as expected, house prices fall further, Northern Rock
could be facing even bigger crises. At
the same time, it's been officially confirmed that both Alliance
and Leicester and Bradford and
Bingley have suffered major losses over dodgy lending. Other effects of the
so-called "sub-prime" crisis, all of them bad, are radiating out
internationally: credit crunch, bankruptcies, unemployment, inflation and the
real threat of a major recession.

In order to momentarily stem this crisis, the US Federal
Reserve, the European Central Bank and, latterly, the Bank of England, have
spent hundreds of billions on the market! These colossal sums injected by the
various central banks alone bear witness to the breadth of the crisis and the
real fears of the bourgeoisie

Today the ‘experts' and other hacks try once again to fill
us with illusions that these convulsions are only a passing phase or a
‘salutary correction of excessive speculation'. Thus the governor of the Bank
of England, Mervyn King, in his latest quarterly report (November 07), while
laying bare the depth of the crisis, talks of a swift recovery. King suggests
that there's no great underlying problem and that growth will ‘bounce back' to
a much healthier level of 3% in two years time. The White House talks about
"the good fundamentals of the economy". The bourgeoisie are both kidding
themselves and kidding us. In reality these shocks are the sign of new phase of
the acceleration of the crisis, the most serious and deepest since the end of
the 60s. And once again the working class will suffer terrible consequences.

The monster of debt reveals the
historic weakness of capitalism

In the media during the summer,
when billions of dollars were going up in smoke, the bourgeois economists were
saying it was "unprecedented". The crisis had apparently appeared out of the
clear blue sky without warning. Lies! Stock market gains, rocketing house
prices, and even growth, all that was built on sand and everyone knew it. Our
organisation already affirmed last spring that the so-called good health of the
economy resting only debt, was preparing for a bleak future: "In reality, it
is a question of a real headlong rush, (into debt) which far from permitting a
definitive solution to the contradictions of capitalism can only prepare for
painful tomorrows and notably brutal slowdowns in its growth".[1] It's
not a question of a premonition but of an analysis based on the history of
capitalism. The present financial crisis is a major crisis of credit and debt.
But this monstrous debt doesn't fall from the sky. It is the product of 40
years of the slow development of the world crisis.

In fact, since the 60s,
capitalism itself has survived through the always growing recourse to debt. In
1967, the world economy began to slow down and since, decade after decade,
growth is less and less. The only response of the bourgeoisie has been to
maintain its system under perfusion, by injecting into it crazy sums of money
in the form of credit and debt. The economic history of the last forty years
forms a sort of infernal cycle: crisis... debt... more crisis... more debt... After the
oil shocks of 1973 and 1979 there was the open recession of 1991-1993, the
Asian crisis of 1997-98 and the explosion of the Internet bubble of 2000-2002[2].
Each time these convulsions are more violent and the consequences more
dramatic.

Today, the crisis is breaking out anew while debt reaches
unimaginable levels. The total debt of the United
States, the first world economic and
military power, has gone from $630 billion in 1970 to $36,850 billion in 2003.
And since then, the machine has got totally out of control. This debt is
growing at a rate of $1.64 billion a day! These breathtaking figures show in a
striking manner the fact that the present financial crisis is much more
profound than those that preceded it.

The housing crisis unleashes a
major financial crisis

For a decade this speculative
madness has invaded all sectors of activity. As never before the overwhelming
majority of capital cannot find sufficient outlets in the real economy (firms
that produce products and goods). Quite naturally then, capital is thus
oriented towards speculation pure and simple. Banks, building societies, more
or less specialised societies of speculation in the placing of risks (the
famous hedge funds) all take part in the gold rush to a supposed new El
Dorado. Money and credit are thus rushed forth and the
bourgeoisie seems to have only one obsession: debt and still more debt.

It's in this totally mad context that householders in the USA,
but also in Britain,
Spain and other
countries, have been strongly encouraged to buy houses and flats without really
having the means to do so. Financial houses are ready to lend money to workers'
families on extremely low incomes with the sole guarantee of their home. The
basic principles of these hypothecated loans is the following: when Mr. X wants
to buy a house for $100,000, a lender, a bank for example, lends him the funds
without reserve and without guarantee other than the security of the house. If
Mr. X is in too much debt and can't repay his borrowing, the lender will take
back the house, re-sell and recuperate its funds of $100,000. That's the sole
guarantee of the bank. That's why it is mainly the hedge funds (specialists in
the placing of risks) that have participated in these sub-primes. Workers can
borrow more easily, thus more and more want to buy a house. Consequently house
prices have risen (10% a year on average). These extremely low-paid workers
have only debt as purchasing power; so they continue to get into more debt by hypothecating
the rising value of their house. For example, Mr. X, seeing the value of his
house rise to $120,000 can credit his purchases by hypothecating up to $20,000.
Then the value goes up to $130,000! And he does it again... But it's not an
endless process. On the one hand the working class becomes poorer (job cuts,
wage freezes...). On the other, borrowing takes place at growing variable rates
and month after month payments become higher and more difficult to make. The
result is inexorable. When too many workers can't make their astronomical
payments, the banks increase their requisitions of hypothecated homes, the
crisis breaks out and the bubble bursts as is happening now. In fact there are
too many houses for sale, prices are falling (they could fall 30% or more).
It's perverse; the buying power of millions of families rests on the price of
their house and thus on their capacity to get into debt and, for them, the
house price falls mean bankruptcy. Thus as the value of Mr. X's house falls (to
$110,000 say) the banks cannot recuperate their total lending of $150,000. Not
only does Mr. X no longer have a home but also he must pay back the difference
of $40,000, plus interest of course! The result in the US
has been rapid[3]:
more than 3 million households are out on the street this autumn.

At the same time, the hedge funds, lending under the
sub-prime form, have themselves not hesitated to indebt themselves to banks and
other credit organisations in order to speculate on real estate. The principle,
quite simple, is to buy property and re-sell it some time later on a rising
housing market. Thus the collapse of the housing bubble also means the
bankruptcy of all these funds. In fact, even in recuperating the hypothecated
houses and throwing millions onto the street, these organisations inherit houses
that are worth hardly as much. By way of the domino effect, banks and other
credit organisations are also hit. Imagine it! These institutions borrow the
one from the other to the point of no longer knowing who owes what monies to
whom! Each passing day we are told that this or that bank or credit
organisation is on the edge of bankruptcy. Such is the case for the USA,
Britain, Germany
and certainly more to follow. It is now the whole credit and speculative sector
that is in crisis and it's the working class who will pay the cost.

Behind the financial crisis, the
crisis of the real economy

"A billion dollars here, a
billion dollars there - it soon adds up to real money". So said one US
senator, confirming that a financial crisis always becomes a crisis of the real
economy. Even before the financial crisis of the summer, the economic
specialists had slyly begun to revise economic forecasts for world growth
downwards. In January 2007, the United Nations announced that it would fall
back to 3.2% this year (after showing 3.8% in 2006 and 4.5% in 2005). But with
the latest developments of the crisis, all these figures will be further
revised downwards.

In fact, the profound crisis of credit inexorably means a
brutal fall in activity for all businesses. Nobody can, or wants to lend money
to business to invest. But the record gains that the latter sometimes show are
in reality based in great part on massive indebtedness. The tap of credit shut,
these businesses, for the most part, will be in a very bad position. The most
striking example is the building sector. The housing bubble being based
exclusively on risky lending means the number of constructions will fall in all
the major countries. And the repercussions will go way beyond that: "in the United
States, as borrowing against housing
finances at least 80% of consumption, it's the whole of household demand that
will be affected. American consumption will thus be cut by a point, a point-and-a-half;
instead of growth of 3.5% next year, it may not pass 2%" (Patrick Artuis,
La Tribune de l'Economie, 27.08.07). And here we are talking about the most
optimistic scenario. Some economists are saying that US
growth could come in at less than 1% and, evidently, this has a global
importance. Europe's economy is profoundly linked to it.
Further, the awaited slowdown of these two economies will have important
repercussions on China
and the whole of Asia. Europe and
the USA
represent 40% of Chinese exports! It is the whole of world growth that will
slow down dramatically.

But there's another aggravating factor in the pipeline:
the return of inflation. China's
inflation rate has reached 6% and continues to grow month after month. This
represents a tendency that will develop internationally, particularly in the
sectors of raw materials and food. The latter is rising around 10% and the
snowball effect means that it will affect the consumption of the working class
and the great majority of the population and that again will rebound on
businesses.

Since the 1960s, market falls and recessions have followed
one another. Each time they become more brutal and profound. This latest
episode will not break the rule as it represents a qualitative step, an
unprecedented aggravation of the historic crisis of capitalism. It's the first
time that all the economic indicators go into the red simultaneously: crisis of
credit and consumption, colossal debt, recession and inflation! We are facing
the worst recession for more than 40 years and major blows will fall on the
working class. Only a united and solid struggle can face up to them. Tino/B
November 2007

[2] A
new internet bubble is being inflated, again based mostly on fresh air. Google
is now worth more than IBM, a company with eight times the revenue. Betters,
speculators and Hedge Funds are getting involved on a bigger scale. All the
problems of the 2000 .com bubble are being revisited at a higher level.

[3] See
the November issue of Internationalism for more on the particulars of the US
economy.